How do we set impact goals if we have an existing enterprise, or portfolio of enterprises?

Many of us start setting goals when we already have an existing enterprise or portfolio of enterprises. We:

Collect, analyse and assess data across the five dimensions of impact, so that we can understand which material effects people and planet experience and/or are likely to experience by engaging with the enterprise or portfolio of enterprises

Set goals to try to prevent material negative effects

Decide, based on our intentions, constraints and financial goals, whether to set goals to increase material positive effects

How do we set impact goals if we are starting from scratch?

If we are creating a new enterprise, or new portfolio of enterprises, our intention guides how we set goals from the very beginning. For example, if our intention is to tackle a specific social or environmental challenge, we start by analysing available data about the cause of the challenge. Which groups of people (who) are not able to achieve which outcomes (what)? How many people are not able to achieve the outcomes, and how deep a change do they need to experience if they are to achieve them (how much)? What is the market or ecosystem currently doing to help those people to achieve those outcomes and can we contribute (contribution)? Are there approaches with a strong track record of succeeding or do we need to take risks and try new models (risk)?

This analysis allows us to set initial impact goals across the five dimensions. Combined with our financial goals, these guide our design of an enterprise, or selection of a portfolio of enterprises, that have the greatest potential to achieve those goals. Once we are dealing with a real enterprise or portfolio, we can set more precise goals, just as those who start with existing enterprises or portfolios do.

For example, if we intend to tackle the challenge of obesity, we could start by trying to understand the causes of this societal issue, and therefore who is likely to be most affected. This analysis may show that low-income families in certain geographies (who) are most at-risk of obesity globally. We then might try to understand what strategies have proven most effective in delivering the physical or mental health outcomes (what) that these people need, in terms of depth, scale, duration and rate (how much). We may choose to create a new enterprise (or invest in a portfolio of enterprises) which replicates delivery of an effect that is already proven to drive the desired result – such as improved diet – or we may trial new strategies that have less substantial evidence bases, like social prescribing for the management of long-term health conditions. These choices depend on the impact risk we’re willing to take, and the contribution we’re seeking to make.

If we are trying to manage impact because we want to avoid material negative effects – like mitigating financial risk or behaving more responsibly – the goal-setting process will look different. We might set a goal to try to have a less (or no) significant effect (how much) on important negative outcomes (what).

What if our impact goals conflict?

Enterprises will often generate both positive and negative impacts simultaneously. When setting goals, we don’t assume that the positive and negative impacts of an enterprise cancel each other out, either:

within the same group of people;

For example, if a person’s financial security is better, we ignore it if their health is worse as a result of working longer hours.

or between different groups of people;

For example, we improve this group of people’s educational outcomes and can therefore ignore that we make the educational outcomes of another group worse.

or between people and planet.

For example, we improve a group of people’s access to energy and therefore ignore that we are polluting the environment.

But we do make judgements about whether achieving a certain positive impact is worth, at a point in time, generating material negative effects.

For example, we make a judgement about whether improving people’s health through air ambulances is worth the substantial carbon emissions generated.

We acknowledge that those material negative effects still need to be managed by setting goals to reduce or mitigate them over time. It is important to note that carbon emissions are one case where positive and negative effects do cancel each other out.

When and how do we adapt our goals?

It is very often the case that enterprises will have material effects on people and planet outside of our original goals.

For example, we may discover that the enterprise has the potential of achieving our goal of enabling many children in a country to have much better health outcomes but likely also generates other material positive effects, such as high quality employment for formerly unemployed individuals, or negative effects, such as carbon emissions.

Learning about the effects that people experience from engaging with an enterprise therefore enables us to re-set our impact goals to include prevention of negative effects and decide whether to include goals to generate other positive effects too.

For example, we might include a goal of reducing carbon emissions, and consider including a goal to employ formerly unemployed individuals.

Do all enterprises set impact goals about their ‘indirect’ impact?

For example, a positive effect that a large business could have through their supply chain may be more significant than the positive effect that a small business could have. The large business’ contribution is likely to make the effects of that supply-chain much better than if it chose not to generate those positive effects. In this case, the large business would find it compelling to set goals to manage material positive effects through its supply-chain, whereas the small business would not.

We set goals based on an enterprise’s material effects on people and planet, regardless of whether they are generated by its products/services, its distribution chain, its operations or its supply chain. We do not consider effects generated by an enterprise’s distribution network, its operations or its supply chain to be necessarily less or more significant than the effects of its products or services. However, our judgement of whether an effect is relevant for impact management includes our judgement of ‘HOW MUCH’ of the effect occurs and whether our ‘CONTRIBUTION’ makes what is currently occurring likely better or worse. The impact generated by a small business through their supply chain will therefore typically be less relevant for impact management than the impact generated by a very large business through their supply chain.

How do we set indicators to understand performance against our goals?

We try to set indicators that describe the effect we are having for all dimensions of our impact goals. Enterprises are typically best placed to identify which indicators – quantitative or qualitative variables that assess performance – are most useful for managing progress against their impact goals. Intermediaries and asset owners may set indicators at a portfolio level, which they can use to identify a mix of strategies that will meet their impact goals (within any constraints of their financial goals).

The diagram below shows indicators chosen to measure progress against the dimensions of how much, who and contribution.

Do we need to set targets?

Setting targets – or being explicit about the level of performance expected against an indicator – is a useful way of comparing performance to an established benchmark of what has been achieved historically or elsewhere (where this information is available).

The process of setting targets – or forecasting expected performance against indicators – is helpful for all partners to agree what ‘good’ performance looks like for a particular set of goals. Targets, like goals, can be re-set, as new information improves our understanding of impact and what is achievable.

Our ability to set targets depends on what information we have about the historical performance of our own and/or comparable strategies.

As those closest to the people or planet affected, enterprises are best-placed to set targets for their impact indicators, as they do for financial indicators.

Investors who are investing in ‘unknown’ frontier markets will typically rely on the targets set by enterprises, since it is those at the frontline who are learning what is achievable, which can inform target-setting in the future.

Specialist investors, with a focus on a specific set of goals may be able to set targets against indicators at the portfolio level, since they have a good understanding of the one (or few) types of approach that they will invest in.

Investors who target different types of goals within an overall portfolio will typically not wish to set targets, as they want to remain deliberately opportunistic about the precise mix of goals that the portfolio achieves as they find promising opportunities. For example, they may want the ability to choose some investments that have a very deep impact on fewer people and other investments that have less depth of impact but reach many people.

What does this mean for investors?

The impact goals of an investment are a function of the impact goals of the underlying business, or portfolio of businesses, that the investment supports, plus the contribution that the investor makes to enable the business(es) to achieve those impact goals.

We separate these two considerations to avoid inappropriate blurring of the impact of underlying businesses and the contribution that an investor makes to those business’ ability to deliver that impact. This sort of blurring often leads to unhelpful comparisons of, for example, an investor buying frequently traded shares of a large multinational that is creating thousands of new high quality jobs for low-income individuals with the impact of an investor providing hands-on equity investment to a small business creating hundreds of new high quality jobs for low-income individuals.

The table below brings together the impact goals of the businesses being invested in (x-axis) and the strategies that investors themselves use to contribute to impact (y-axis). This allows us to plot the landscape of relevant investment options currently available to investors. An investor can plot their existing portfolio and then transition that portfolio over time to be impactful in the way that they wish, given their intentionsand constraints.

How do our impact goals relate to our financial goals?

We do not have sufficient data to generalise that certain impacts always deliver certain types of financial performance, nor vice versa. This means that we also cannot generalise that having certain types of impact goals means that we should have certain types of financial goals. However, for individual enterprises, or investments in enterprises, we do consider either what financial performance we can forecast for the impact goals we to achieve, or what impact performance we can forecast for the financial goals we want to achieve.

For example, one enterprise may assume that the impact goals they want to achieve are capable of delivering competitive risk-adjusted financial returns. Another enterprise may assume that their impact goals are capable of delivering competitive risk-adjusted financial returns but over a longer time horizon than the market would typically tolerate. Another enterprise may assume that their impact goals require them to accept a disproportionate financial risk/return, for example because they are testing whether market creation is possible for a very marginalised population.

Being transparent about the assumptions we are making about the interplay of a specific enterprise or investment’s financial goals and impact goals makes it easier for everyone we are working with to determine whether we share the same expectations, including the assumptions we are willing to make and the uncertainties we are able to tolerate. When we are explicit about our assumptions, we should also be explicit about:

what information those assumptions are based on

how we determine what information is more or less material (to both financial and impact performance)

the timeframe relevant for our understanding of materiality

For more on the interplay of impact goals and financial goals, see here.

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